Alabama's prepaid tuition program will go broke in three years by one estimate

(File)Alabama's Prepaid Affordable College Tuition Program may go broke in three years.

Alabama's ailing prepaid college tuition program will go broke in about three years without a court settlement or an influx of hundreds of millions of dollars from the state, the state treasurer estimated.

The Prepaid Affordable College Tuition plan has about $347 million in investments, but it's paying out about $100 million each year in tuition to families, said Alabama Treasurer Young Boozer.

"That gives me basically three years of cash flow," Boozer said.

PACT officials thought they had a solution to the program's money woes in a lawsuit settlement with parents that would have capped tuition benefits at 2010 levels. Parents and students would have had to pay the rest. But the Supreme Court last week tossed out the settlement, raising questions about the future of the program.

"This settlement is the best possible solution to the problem. I'm confident in that. We just need to clear the way to put them in place," Boozer said.

A Jan. 31 report by Sherman Actuarial Services estimated PACT would need an additional $843.9 million between now and September 2032 to pay the estimated tuition payments of all of the current enrollees.

"This is how much additional cash would have to be put to it meet the obligations that are projected. It is a significant number," Boozer said.

The report estimated PACT will have to pay out $1.6 billion to cover tuition for its roughly 40,000 participants over the next 20 years.

The actuarial estimate is based on assumptions of certain tuition increases at different schools, few families leaving the program and a 2 percent investment return, a figure Boozer said is small but realistic given that the program's dwindling assets are in fixed-income investments.

Double whammy

The Alabama Legislature created the PACT plan in 1989 to allow families to buy into the program with the expectation that the contract would cover their children's future college tuition and fees.

The program worked for nearly 20 years, but it ran into financial trouble in recent years after being hit with the double whammy of skyrocketing tuition rates and the bear market, which caused the plan's investments to lose about half their value.

Alabama lawmakers in 2010 tried to bail the struggling program out by agreeing to steer $547.6 million over 13 years to PACT. The payments begin in April 2015.

But what once was thought to be a bailout turned out to be more of a Band-Aid, according to the most recent actuarial report, which estimated the plan will go into the red starting in 2015 despite the influx of cash.

Some parents sued and after mediation a settlement with the PACT board called for the benefits to be capped at 2010 rates.

But other parents objected and the Supreme Court tossed out the agreement. The court said the settlement violated language in the 2010 law that set up the bailout, which the court interpreted as prohibiting PACT from altering the contracts.

Boozer said he disagreed with that interpretation and will ask the court to reconsider.

"If they tell me I can't make any change .¤.¤. then this thing runs to extinction, which makes no sense to me. There should be something we can do. We can step in and make some changes to salvage a great value for these folks. And that's what we need to do," Boozer said.

"To say we can't do anything, I'm not standing by that," Boozer said.

Boozer said the program will sometime soon hit "the point of no return," in which the program's assets will equal what the contract holders paid in.

"People are extremely concerned. I understand that totally. I feel for them. What we need to do is extract the uncertainty from all this. The best thing we can do now is to lock down the settlement," Boozer said.

However, Wally Walker, a lawyer representing objecting parents, said he is dubious about the estimates, believing a doomsday scenario is being presented to encourage the settlement.

"I think they are providing the doomsday scenario and what amounts to Hobson's choice," Walker said.

Walker said different figures have been floated at different times, including when lawmakers approved the 2010 bailout.

"When people start scaring everybody with the doomsday scenario that there is not enough money. Not enough money when? And based on what estimate?" Walker said.

Boozer said it's true these are estimates, but he said they are the best estimates available.

Boozer said the program's money is in fixed-income investments because it has too few assets and too many obligations to gamble on riskier ones.

"I do not have the luxury of being able to invest in anything but fixed-income because I can't take the principle risk if I'm in equities and the equity market was to drop," Boozer said.

Sandra Lee is one of the parents who bought a PACT plan, expecting tuition for her daughter, Lauren, to be fully covered. Lee used the proceeds of her mother's tiny life insurance policy to pay off the PACT contract. It was a fitting use of the money, Lee said, because her mother had valued education so dearly, never having had the chance of an education herself.

"I knew she would get such joy in knowing that she paid for her grandchild's college," Lee said.

Peggy Matthews was the youngest of 12 children born to a sharecropper. She loved learning but had to drop out of school in the eighth grade to help the family pick cotton, according to her daughter. She "worked her tail off" so her children could have more than she'd had.

"When Lauren was born I remember seeing the commercials and advertisements and billboards (for PACT). My mother would also say. 'You need to do that so her college will be taken care of,'" Lee said.

Lauren is now 18. She doesn't have many memories of her grandmother, but she did grow up knowing her grandmother had paid for her to go to college. Now Lee worries that the money won't be there to cover the tuition payments.

"What does the word pact mean? The very meaning of that word is a promise. A promise. I'm asking them to keep their promise," Lee said.

Court ruling

When the Supreme Court voided the settlement, justices said it violated wording in the 2010 law that provided extra state funding to the program. That law said PACT "would not violate the contractual relationship existing between a PACT contract holder and the PACT board."

"However well-intentioned, the settlement agreement is clearly contrary to state law," the majority opinion read.

Legislators are hopeful that they can overcome the high court's objection by striking the section of the 2010 law that the court used as a basis to toss the settlement.

"The plan is to fast-track it," said sponsor Rep. Jay Love, R-Montgomery.

But House Minority Leader Craig Ford, D-Gadsden, said the Legislature created the PACT plan, and it should make sure participants get the full tuition they expected when they signed up.

Ford has proposed to get more money to PACT by altering the Rolling Reserve Act, passed last year. He has introduced a bill that would steer a portion of any excess Education Trust Fund revenue, after the state education rainy day account is repaid, to cover PACT shortfalls.

However, Love, who is chairman of the House Ways and Means Education Committee, said the state simply can't afford the amount it would take to shore-up the program.

Love said he thought the $547 million lawmakers already steered to the program is as far as "they can and will go."

Avoided woes?

Walker said he thought PACT's woes could have been avoided, or at least mitigated.

"If in years gone by this had been tended to and looked after better, with better investment advice, I think a lot of this could have been avoided," Walker said.

Boozer disagreed.

"We went back and looked at all that. The only investment strategy that might, and I emphasize might, have allowed this to work was 100 percent equities. That is an unbelievable risky asset allocation," Boozer said. "The volatility that you would have had in the portfolio and the risk you would have been taking at any point in time is unacceptable."

Patti Lambert, co-founder of Save Alabama PACT and a member of the PACT board, said restoring the settlement appears to be the only way to keep PACT from shutting down.

She urged parents not to panic over the projections that the program will soon run out of money. If parents rush to withdraw their money from the program, they could collapse PACT quicker by draining the remaining assets. Lambert said that, with the bills aimed at overcoming the Supreme Court's objection on the fast track in the Legislature, she feels better than she did a week ago, when the court overturned the settlement.

"We are dedicated to getting this resolved," Boozer said.

PACT purchasers said they just hope something is done.

"We need to do what we told them we would do to some extent, or we are going to be the biggest glorified Ponzi scheme in the history of America," Lambert said.